Developing DeFi solution on Ethereum
Decentralized Finance or DeFi is a collective effort made by bringing blockchain and financial services together over a single platform. Defi is based upon the new concept of open finance where anyone as a person who is not covered under the traditional finance and banking systems gets offered a variety of services with the help of the Ethereum blockchain. DeFi seeks to provide all-round inclusive financial system that can be assessed by anyone who has an internet connection, as it utilizes the blockchain-based peer-to-peer concept of a transaction.
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Why is Ethereum preferred for developing DeFi solutions?
Ethereum since its launch has grown in billions and currently is the largest used blockchain network, and is perfectly suited to develop DeFi-based solutions. Ethereum’s large and diverse network addresses the problem of the traditional finance sector which is greatly dependent on centralized institutions and banks. Nevertheless, to mention the complex regulations and formalities need to be followed, while DeFi built over Ethereum is fast, safe, and opens up diverse opportunities. The efficiency, speed, and accuracy of Ethereum’s EVM make it the most versatile blockchain, and its ERC20 tokens hold the record of the most executed ones over smart contracts. The power of defining the rules of interaction with other tokens is with Ethereum and this makes Ethereum development services the preferred choice for developing DeFi solutions.
Different types of DeFi applications
Developing DeFi solutions over Ethereum has a number of benefits and there are wide range of DeFi applications, some of which we will discuss here.
Decentralized Exchanges (DEX)
One of the most rampant applications to exist is the Decentralized Exchanges (DEX), which are a kind of trading platform that lets direct peer-to-peer cryptocurrency transactions. DEX are unique in their kind of exchanges which function over self-executing smart contracts so that any kind of centralized authority or third-party arbitrators can be eliminated. DEX can be developed at much lower costs than CEX and there are different categories of DEX like order booking exchanges, swaps and aggregators which we will discuss below.
These are specialized platforms built to lend cryptocurrencies to borrowers instantly, which are lent by lenders. Here borrowers must possess enough collateral to make a deposit in the smart contracts and such type of lending platforms ensure that there is no preferential treatment to any of the borrowers while ensuring a censorship-free environment.
Well, if we speak technically Stablecoins are not any type of DeFi project, but they are the fuel, which funds DeFi projects run. Stablecoins were invented as a special type of cryptocurrency whose price remains stable, and they were invented to counter the volatile nature of the cryptocurrency market.
There are majorly three different kinds of stablecoins found which are, fiat-backed, commodity-backed, and cryptocurrency-backed stablecoins.
Yield farming is the most exciting part of the DeFi application, which involves staking and lending crypto assets in the liquidity pool. In yield farming, the fund providers stake up their crypto assets in a smart contract, and in return, they get benefits like governance tokens or a percentage of the transaction as a form of reward.
In yield farming, as a greater number of funds-providing investors join the value of issued returns depreciates, since it is network liquidity-providing tool.
Ideating and developing an efficient DeFi project can be a challenging task due to various regulatory compliances around the world. However, a senior DeFi developer at Rejolut opines that Ethereum already has the largest share of DeFi solutions present. So, it would be fast and economical to build your DeFi project on Ethereum if you are looking to develop a high-return financial solution while involving low risk.